Credit checks: A civil-rights issue?

Studies haven't found a link between poor credit and job performance, but more employers are checking, and minorities are getting squeezed. Insurers are slammed for checking, too.

By Christian Science Monitor

Lisa Bailey worked for five months at Harvard University as a temp entering donations into a database. When the university made the job a salaried position, Bailey, who is black, saw a chance to lift herself out of dead-end jobs.

Bailey's superiors encouraged her to apply, she says, but turned her down after discovering her bad credit history.

Bailey, with her lawyer, has lodged a complaint against Harvard charging racial discrimination. The reason: Studies indicate that minorities are more likely to have bad credit, but credit problems have not been shown to negatively affect job performance.

Some privacy and minority advocates are now seeing credit as a civil-rights issue as minorities start to fight employers and insurers who base decisions on credit histories. Their effort could slow the near doubling in credit checks by employers in the past decade, which affects millions of Americans who are struggling with debt.

"It's definitely a civil-rights issue because of the growing use of credit reports and credit scores for hiring, renting an apartment, insurance and the fact that people of color have not been integrated into the credit-scoring system as much as traditional white middle-class America," says Evan Hendricks, the author of "Credit Scores & Credit Reports: How the System Really Works, What You Can Do."

In a 2004 study involving 2 million people, the Texas Department of Insurance said blacks had an average credit score roughly 10% to 35% worse than whites; Hispanics had scores 5% to 25% worse than whites.

Credit checks are a growing factor in hiring, with 35% of employers checking applicants' credit in 2003, up from 19% in 1996, according to the Society of Human Resource Management, an association for human-resource managers. Typically, credit reports are done if a person is going to deal with money, says John Dooney, a manager of strategic research for the association.

A case for considering credit
Employers should look at credit only for jobs in which the information is relevant, says Lester Rosen, the president of Employment Screening Resources, a national background-screening firm in California. He cites a few examples:

For jobs handling money, people may have a motive to steal if their debts surpass their salaries.
For jobs requiring travel, bad credit could bar applicants from renting cars or buying tickets.
For jobs managing money, a credit report can offer clues on how applicants manage their own.
Particularly in that last scenario, Rosen cautions employers to be circumspect because blemishes might be errors or beyond an applicant's control, such as sudden medical expenses. Legally, employers must receive written permission from applicants to do a credit check and must give those denied because of credit a chance to respond.

Rosen defends the careful consideration of credit in the hiring process. "If Harvard hired a person and did not use a credit report and the person embezzled, what would the headline be?" he asks.

So far, there's a lack of data supporting a relationship between bad credit and theft by employees. In perhaps the only study published on the subject, Jerry Palmer and Laura Koppes of Eastern Kentucky University in Richmond in 2003 found no correlation between employee credit reports and negative performance or termination for dishonesty.

Anti-discrimination laws bar hiring practices that disadvantage minorities, even inadvertently, unless a company can prove the practices are related to measuring a person's capability to do a job. Bailey's lawyer, Piper Hoffman, has taken on several cases in which companies used credit as a factor in the hiring process. In one 2004 case, she says, an employee's lawsuit against Johnson & Johnson resulted in a settlement that changed the way the company used credit in its hiring practices.

"In the larger picture, we're hoping to get Harvard and other employers to stop using credit as a criterion in hiring," Hoffman says.

Bailey lodged her complaint in November with the federal Equal Employment Opportunity Commission, or EEOC, which reviews all such cases before any lawsuits can be filed. Agency officials say there's anecdotal evidence these cases are on the rise.

"Employers seem to be assuming that somebody with a poor credit history is more likely to steal, and I don't think there's any kind of evidence that supports that," says Dianna Johnston, an assistant legal counsel with the EEOC. "To the extent that the employer has done an in-depth look and found other indices of dishonesty, they would be on more solid ground."

In a statement, Harvard notes that a "relatively small percentage" of jobs at the university require a credit check.

"The university conducts credit history reviews for employment purposes as required by credit card issuers, as well as to fulfill our fiduciary and data privacy responsibilities," the statement says. "Those responsibilities include protecting the private credit card data of our students, faculty, parents and alumni."

Bailey says that if Harvard was concerned she might steal, the university should have looked at criminal records instead. "I was a cashier for many years, and I've never been rich, and I've never stolen money," she says.

She ran into credit card debt she couldn't pay back when she spent some time unemployed. Harvard, she says, offered to reconsider if she could clear up her report in one week.

"The only way I can get it cleaned up in seven days is if I have money, so there was no way," Bailey says.

Catch-22 for poor people
Ernest Haffner, a legal adviser with the EEOC, notes that employers who screen for credit are setting up a Catch-22 for poor people: They need jobs to get good credit, but employers won't hire them because they don't have it.

The racial component to credit histories has been challenged in the insurance arena, too. The Texas Department of Insurance study found a relationship between credit scores and claims filed.

However, a class-action lawsuit against Allstate has just been settled, which resulted in the company changing the way they evaluate credit reports, says Wendy Harrison, a Phoenix lawyer who brought the case.

"What we've argued in our (insurance) cases is that you can adjust for (racial bias)," Harrison says, who has also handled cases of credit screening by employers.

Employers, however, are probably not relying on a number rating that can be adjusted because, according to Rosen, agencies give them only specialty reports that don't include a score. Harvard says their report had no score.

As for Bailey, she still wants the Harvard job and says there would be "no hard feelings." But first she wants to change the system for herself and others. "I hope I win. It might be beneficial to other people, too," she says.